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What are the earnings after tax for firm

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Corporation A and Corporation B are both expected to enjoy earnings before interest and taxes of $100,000. Corporation A will also incur $40,000 in interest expenses as a result of borrowing, while Corporation B will have no interest expense as it does not use debt financing. Instead Corporation B will pay shareholders $40,000 in dividend income. Both companies are in a 40% tax bracket. (1) What are the earnings after tax for each firm? (2) Which company has the higher after-tax earnings? (3) Which firm appears to have the higher cash flow? (4) How do you account for the difference? Please show your work.

Reference no: EM132670207

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